Broader FX option implied volatility plummeted from Monday's highs as the anticipated tariff threat and associated FX realized volatility failed to materialise, bringing relief to investors.

EUR/USD led the plunge but short positions from the higher levels in most currency pairs would have returned big profits. Benchmark 1-month EUR/USD implied volatility fell from the low 9s to the low 7s and 1-year from 8.0 to 7.2 before meeting demand. One-month expiry GBP/USD fell almost 2.0 to the lows 8's and AUD/USD 1-month from 11.0 to 9.75.

It was not until late Tuesday that U.S. President Donald Trump finally mentioned the potential for 10% tariffs on China from Feb. 1, but that is significantly less than the numbers threatened during his campaign and was ignored by the FX options market. One-month USD/CNH implied volatility has since extended its decline from Monday's early 6.5 peak to 5.25.

USD/CAD implied volatility was quick to revert higher early Tuesday after Trump threatened Canada with 25% tariffs from Feb. 1. Benchmark 1-month expiry implied volatility had fallen hard from 8.9 to 7.25, but has been well supported around 8.0 amid post Feb. 1 demand for USD/CAD volatility and topside strike protection since.

USD/JPY implied volatility slumps to new long term lows across the entire 1- to 12-month expiry term structure. There is a 10% chance that the Bank of Japan does not hike rates on Friday and topside options would provide a cheap hedge.

For more click on

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 1-3-12-month expiry USD/CAD option implied volatility 1-month expiry FXO implied volatility

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

(Richard Pace is a Reuters market analyst. The views expressed are his own; Editing by Alison Williams)

((Richard.Pace@Thomsonreuters.com))